New fund mechanism for core sector soon

Innovating funding mechanism will be operationalised with ministries of surface transport, railways and civil aviation inviting bids for ide...

Innovating funding mechanism will be operationalised with ministries of surface transport, railways and civil aviation inviting bids for identified projects in the infrastructure sector. The funding scheme which aims at bridging the ‘viability gap’ to make the public-private partnership work for development of infrastructure projects was announced by Finance Minister Jaswant Singh in his Budget speech.

The viability gap, said a senior finance ministry official, is proposed to be bridged by allocation of additional funds to make projects economically viable. The official said most infrastructure projects are not viable in view of huge cost, long gestation period and low rate of returns. To retain the interest of private sector in these projects, the government has come out with innovative funding mechanism. Initially the projects will be taken in sectors such as roads, railways, airports and seaports. The scheme, which will begin in the coming fiscal, could be extended to other sectors depending upon the success of the funding mechanism.

Explaining the operational aspect of the new initiative, the official said the government will invite bids for infrastructure projects from interested parties. After ascertaining the technical competencies of bidders, it will look at the viability gap. The bid with the least viability gap will be accepted. And the government will bridge that gap to make the project financially viable. The mechanism will help in leveraging the public fund for development of infrastructure sector with private partnership.

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Officials said that though the Finance Minister has earmarked Rs 2,000 crore to bridge the viability gap, more funds can be arranged depending upon the response to the scheme.

Commenting on the funding initiative of the finance ministry, Saumitra Chaudhury, chief economist, ICRA, said, “In principle it is a correct way of going about funding in infrastructure projects. However, one has to see how this scheme works.” According to Chaudhuri, the scheme would have to contend with how realistic the projected rate of return is. “Sometimes the projected rate of return may be shown as 12 per cent by a private investor, while the rate of return is 6 per cent and this is shown so that the government may fill the gap. One has to see how the scheme works,” he elaborated.

The minister in his Budget speech said government will provide an initial contribution of Rs 2,000 crore for 48 road projects, National Rail Vikas Yojana, two airports, two sea ports and to convention centres. Out of the 48 road projects, the detailed project reports of eight are ready. The ministry of surface transport will soon be inviting bids for them, based on the new funding mechanism announced by the finance minster. Similarly, civil aviation ministry and railways ministry will be inviting bids for the identified projects.

On a flow basis, the minister said, the average annual commitment for all these projects is expected to be around Rs 2,000 crore per annum in the medium-term. The requirement will be met annually from the budgets of railways and the government.

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Projects worth Rs 60,000 crore are proposed to be taken up under the innovating funding initiative in the next fiscal.

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